State-controlled Russian oil company Rosneft has struck a two-part deal worth about $55 billion to buy privately-owned TNK-BP and make British oil company BP a near-20 percent Rosneft shareholder with two seats on the board.
The first part of the Kremlin-backed agreement announced by Rosneft on Monday folds BP's half of TNK-BP, Russia's third-largest oil company, into Rosneft, in exchange for cash and Rosneft stock in an agreement worth about $27 billion including $12.3 billion of cash and the rest in stock.
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In stage two, AAR would get $28 billion in cash, but the two deals are independent of each other and the AAR deal is still subject to negotiations, Rosneft said.
With the whole of TNK-BP on board, Rosneft, which is already Russia's top oil producer, will control nearly half of Russia's oil output and pump more oil and gas than Exxon Mobil, the world's top international oil company.
The deal gives Rosneft extra output and cash flow to finance exploration of Russia's vast reserves to replace ageing and depleting fields. It keeps BP's expertise in Russia and provides the "quality" private shareholder President Vladimir Putin wants in order to show his critics he is pursuing a real privatization agenda.
"This is a very good signal for the Russian market. It is a good, large deal. I would like to thank you for this work," Russian President Vladimir Putin told Rosneft CEO Igor Sechin.
It allows BP to end a stormy relationship with AAR, and to pursue closer ties with a Kremlin that exerts a much tighter hold on the oil industry than it did in the 1990s when BP first invested in Russia.
TNK-BP is highly profitable and provides a quarter of BP's total production, but its fields are mature, and the Soviet-born tycoons who own the other half through AAR have blocked BP's search for growth in Russia through closer ties with Rosneft.
"It's certainly a historic deal and a historic day for BP and Rosneft and TNK-BP," said Santander analyst Jason Kenney.
"I do think Rosneft is the winner in this. They get a lot of credibility by having a western investor on the board and involved in its Russian resource and operations, and it's a good partner to have. For BP, they get an early monetization of its current Russian asset base, they shake off the political troubles that it had by having that stake, but a lot of the upside for BP is probably long-dated and it's difficult to see how it's going to be valued into BP's share price on a near-term basis."
Executives at TNK-BP have in the past had run-ins with Russian law enforcement at times of friction between the shareholders, with two managers arrested in 2008 amid a dispute over strategy that forced then-CEO Bob Dudley, who now heads BP, to flee Russia.
Should the deal survive a months-long approval process, BP's exposure to Russia would be lower, but with seats on the board it has closer ties than any of its rivals to Sechin, who has a significant say in energy policy.
OLIGARCHS UNDER PRESSURE
The four tycoons of AAR, are reluctant to remain in a joint venture with the politically powerful Russian state oil company.
(Writing/reporting by Melissa Akin; Additional reporting by Douglas Busvine and Vladimir Soldatkin in Moscow; Editing by Giles Elgood)